Federal Deposit
Insurance Corporation

2009 Annual Report

IV. Financial Statements and Notes

Deposit Insurance Fund (DIF)

NOTES TO THE FINANCIAL STATEMENTS
DEPOSIT INSURANCE FUND
DECEMBER 31, 2009 AND 2008

1. Legislation and Operations of the Deposit Insurance Fund

Overview
The Federal Deposit Insurance Corporation (FDIC) is the independent deposit insurance agency created by Congress in 1933 to maintain stability and public confidence in the nation's banking system. Provisions that govern the operations of the FDIC are generally found in the Federal Deposit Insurance (FDI) Act, as amended (12 U.S.C. 1811, et seq.). In carrying out the purposes of the FDI Act, as amended, the FDIC insures the deposits of banks and savings associations (insured depository institutions), and in cooperation with other federal and state agencies promotes the safety and soundness of insured depository institutions by identifying, monitoring and addressing risks to the Deposit Insurance Fund (DIF). An active institution's primary federal supervisor is generally determined by the institution's charter type. Commercial and savings banks are supervised by the FDIC, the Office of the Comptroller of the Currency, or the Federal Reserve Board, while savings associations (known as "thrifts") are supervised by the Office of Thrift Supervision.

The FDIC is the administrator of the DIF. The DIF is responsible for protecting insured bank and thrift depositors from loss due to institution failures. The FDIC is required by 12 U.S.C. 1823(c) to resolve troubled institutions in a manner that will result in the least possible cost to the deposit insurance fund unless a systemic risk determination is made that compliance with the least-cost test would have serious adverse effects on economic conditions or financial stability and any action or assistance taken under the systemic risk determination would avoid or mitigate such adverse effects. A systemic risk determination can only be invoked by the Secretary of the U.S. Treasury, in consultation with the President, and upon the written recommendation of twothirds of both the FDIC Board of Directors and the Board of Governors of the Federal Reserve System. The systemic risk provision requires the FDIC to recover any related losses to the DIF through one or more special assessments from all insured depository institutions and, with the concurrence of the U.S. Treasury (Treasury), depository institution holding companies (see Note 16).

The FDIC is also the administrator of the FSLIC Resolution Fund (FRF). The FRF is a resolution fund responsible for the sale of remaining assets and satisfaction of liabilities associated with the former Federal Savings and Loan Insurance Corporation (FSLIC) and the Resolution Trust Corporation. The DIF and the FRF are maintained separately to carry out their respective mandates.

Recent Legislation
Helping Families Save Their Homes Act of 2009 (Public Law 111-22) was enacted on May 20, 2009. This legislation provides for: 1) extending the FDIC's deposit insurance coverage from $100,000 to $250,000 until 2013, 2) extending FDIC's authority to borrow from the Treasury in amounts necessary to carry out the increased insurance coverage, notwithstanding the amount limitations contained in Sections 14(a) and 15(c) of the FDI Act, 3) repealing the prohibition against the FDIC taking the increased insurance coverage into account for purposes of setting assessments, 4) extending the generally applicable time limit from 5 years to 8 years for an FDIC Restoration Plan to rebuild the reserve ratio of the DIF, 5) permanently increasing the FDIC's authority to borrow from the Treasury from $30 billion to $100 billion and, if necessary, up to $500 billion through 2010, and 6) allowing FDIC to charge systemic risk special assessments by rulemaking on both insured depository institutions and, with Treasury concurrence, depository institution holding companies.

The Emergency Economic Stabilization Act of 2008 (EESA), legislation to help stabilize the financial markets, was enacted on October 3, 2008. The legislation requires that Treasury consult with the FDIC and other federal agencies in the establishment of the troubled asset relief program (known as TARP).

Operations of the DIF
The primary purpose of the DIF is to: 1) insure the deposits and protect the depositors of DIFinsured institutions and 2) resolve DIF-insured failed institutions upon appointment of FDIC as receiver in a manner that will result in the least possible cost to the DIF (unless a systemic risk determination is made).

The DIF is primarily funded from deposit insurance assessments and interest earned on investments in U.S. Treasury obligations. Additional funding sources, if necessary, are borrowings from the Treasury, Federal Financing Bank (FFB), Federal Home Loan Banks, and insured depository institutions. The FDIC has borrowing authority of $100 billion from the Treasury, and if necessary, up to $500 billion through 2010. Additionally, FDIC has a Note Purchase Agreement with the FFB not to exceed $100 billion to enhance DIF's ability to fund deposit insurance obligations.

A statutory formula, known as the Maximum Obligation Limitation (MOL), limits the amount of obligations the DIF can incur to the sum of its cash, 90 percent of the fair market value of other assets, and the amount authorized to be borrowed from the Treasury. The MOL for the DIF was $118.2 billion and $69.0 billion as of December 31, 2009 and 2008, respectively. In connection with the temporary increase in the basic deposit insurance coverage limit from $100,000 to $250,000, the FDIC may borrow from the Treasury to carry out the increase in the maximum deposit insurance amount without regard to the MOL or the $100 billion limit.

Operations of Resolution Entities
The FDIC is responsible for managing and disposing of the assets of failed institutions in an orderly and efficient manner. The assets held by receiverships, pass-through conservatorships and bridge institutions (collectively, resolution entities), and the claims against them, are accounted for separately from DIF assets and liabilities to ensure that proceeds from these entities are distributed in accordance with applicable laws and regulations. Accordingly, income and expenses attributable to resolution entities are accounted for as transactions of those entities. All are billed by the FDIC for services provided on their behalf.